'Take it easy' and 'be as frugal as possible': Financial experts from the boom years speak from experience about ways out of the recession

'Take it easy' and 'be as frugal as possible': Financial experts from the boom years speak from experience about ways out of the recession

‘Take it easy’ and ‘be as frugal as possible’: Financial experts from the boom years speak from experience about ways out of the recession

It was a time of big hair, padding and the Cold War. But something that’s often less thought about when you’re waxing nostalgic about the 80s were interest rates that were high enough to make you dizzy.

“Interest rates started the decade around 20%,” says Brad Lyons, a certified financial planner and investment manager at Georgia-based Wiser Wealth Management. “They have the [raised] them dramatically in the late 1970s…trying to keep up with inflation.’

In the early 1980s, Lyons was about 20 years old. And while today’s interest rates still seem small in comparison, there’s a lot to be learned from people who have been through it.

Consumer prices were 8.5% higher than a year ago, according to July inflation data. In June, it was 9.1%. Such percentages have not been seen in decades.

And people who remember the absurdly high interest rates that followed the high inflation of the 1970s say buckle up and be smart because we’re in for a long time.

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The Great Inflation of the 1970s and 1980s

Experts draw parallels between the high inflation of five decades ago and what is happening today.

Then there were several factors at play, low unemployment, the removal of the gold standard (the monetary system in which the currency is backed by gold), but energy prices pushed things to their limits.

In 1973, the price of oil nearly quadrupled when the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the West because of Israel’s support in the Yom Kippur War. There were a series of side effects that led to swelling inflation and stagnation. Then the Iranian Revolution at the end of the decade sent oil prices soaring again.

By 1980, inflation was 14.5% and unemployment reached 7%. The Federal Reserve raised its federal funds rate to a whopping 17% (by comparison, it’s currently 2.25-2.5%).

The high interest rate made getting ahead almost impossible, says Mike Drake, who was a banker at the time. He remembers his mortgage rate was 17.5% at the time.

“The prices were going up, it was almost every month they were going up,” Drak says. “So it seemed like it was something that didn’t seem like it was ever going to stop. And I remember at one point saying, “If I could ever find a day where I could find a 10% mortgage rate, I’d be the happiest person in the world.”

Drake is the author of Victory Lap Retirement and Retirement, Heaven or Hell: Which Will You Choose? and senior associate at Boom encorea finance blog focused on baby boomers.

Pay off the debt

Debt at that time mounted quickly, Drak says — on houses, on credit cards and on vehicles.

“It was difficult, scary times. But we were lucky because we could work. So our wages continued to increase – not at the same rate – but it required both of them to work to help pay off the debt.”

One of the most important things you can do during high-interest times is pay off debt, he says. Then his goal was to pay off his mortgage, which wasn’t easy.

“You have to have a lot of discipline, you have to say I want to make one-off annual additions to it because the interest rate was crushing and I didn’t want to be trapped.”

Brad Lyons recommends that people stay away from credit card debt.

“Pay off the debt as much as [you] can, as far as [you’re] can do it,” he said.

Paying off debt, especially now, can sound daunting, but there are a few different tactics you can use to avalanche method and snowball method.

Stay invested

As tempting as it may be to pull money out of your investment accounts, especially as you watch the numbers take a dive, Lyons says don’t give in to that temptation.

“During periods where you’ve had downgrades in the stock markets, nobody likes to see their account valuations go down, their retirement plan accounts that they’re used to seeing go up and up and up year after year in a year,” Lyons says. “And now they’re seeing it go down somewhat, but it’s going to come back over time.”

For younger generations, he says, it’s an opportunity to invest at a lower cost if you can afford it.

“What we’re suggesting is that people stay invested, maintain their asset allocations that are designed to meet their goals within the timeframes they’ve set themselves, and continue to add to their investment portfolio through their savings in a retirement account. “

Dollar cost averaging is one of the most reliable strategies. It is investing the same amount of money at regular intervals regardless of what the market is doing.

“By taking advantage of lower valuations, you’re effectively buying more stock at a lower price,” Lyons says.

Save your pennies

While it can be difficult when every trip to the grocery store is costing you more and the price of everything is going up, both Drake and Lyons say saving is extremely important and can be beneficial.

“As interest rates continue to rise, we will begin to see higher interest rates in our savings accounts and newly issued fixed income securities,” Lyons says.

If you put your money in a high yield savings account, will grow faster than it would have just a few months ago. And while that probably won’t keep up with current inflation, it helps build a safety net.

Settle in for a long time

The 1980s was a long decade. There were two recessions and it was years before inflation was contained and interest rates began to fall. And while our current situation is a bit different, if there’s one thing we can learn from the past, it’s that inflation and higher interest rates will be here for a while.

“Hurry up,” Drak says to younger generations navigating a similar financial landscape. “Try to work as hard as [you] might as well make as much money as [you] may as well be so frugal [you] i can This is the puzzle. And there’s no way around it. You must be prudent. You need to pull over and you need to be careful with your money.

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This article provides information only and should not be construed as advice. Provided without any warranty.

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